When markets turn volatile, investors don’t just worry about returns they worry about downside protection. The ability of an investment to cushion losses during market downturns is what truly defines its resilience.
Among mutual funds, two categories often come into the spotlight for this purpose: Hybrid Funds and Debt Funds. Both promise relative stability compared to pure equity, but which of the two provides better downside protection? Let’s break it down.
– Understanding the Categories
1. Debt Mutual Funds
Debt mutual funds primarily invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, and money market instruments. Their primary objective is to deliver steady returns with relatively low risk.
2. Hybrid Mutual Funds
Hybrid funds invest in a mix of equities and debt instruments, and sometimes even gold. Depending on the allocation, they may be:
i) Conservative Hybrid Funds – higher debt (75–90%) and limited equity (10–25%).
ii) Balanced Hybrid Funds – 40% to 60% investment in equity & equity related instruments; and 40% to 60% in Debt instruments
iii) Aggressive Hybrid Funds – 65% to 80% investment in equity & equity related instruments; and 20% to 35% in Debt instruments
– How Do They Protect Against Downside?
Debt Funds
1. Lower volatility as debt instruments are less sensitive to market crashes.
2. NAVs usually fall less sharply compared to equity-oriented funds.
3. Risks include credit defaults (e.g., corporate bond downgrades) and interest rate fluctuations.
4. In times of rising yields, bond prices fall, which can dent returns.
Hybrid Funds
1. Equity component allows participation in growth during recovery phases.
2. Debt cushion provides some downside protection during equity corrections.
3. Balanced or dynamic asset allocation funds can shift between equity and debt depending on market conditions.
4. Still exposed to equity drawdowns, especially in aggressive hybrids.
5. Not as stable as pure debt in a sharp equity market crash.
– Historical Performance During Market Downturns
| Scenario | Category | NAV Before Crisis | lowest point of NAV | Actual Drop % |
| Covid- 19 | Hybrid Fund | 45.41 | 42.03 | -7.44 |
| Debt Fund | 41.35 | 41.21 | -0.34 | |
| Global Financial Crisis | Hybrid Fund | 16.03 | 13.05 | -18.60 |
| Debt Fund | 15.17 | 15.16 | -0.04 |
| Scenario | Category | NAV Before Crisis | Point Of Recovery | Time Taken |
| Covid- 19 | Hybrid Fund | 45.41 | 45.47 | 6 Months |
| Debt Fund | 41.35 | 42.14 | 3 Months | |
| Global Financial Crisis | Hybrid Fund | 16.03 | 16.93 | 1 yr 8 month |
| Debt Fund | 15.16 | 18.47 | N/A |
During Covid, Hybrid Funds fell -7.4% but recovered in 6 months, while Debt Funds dipped just -0.3% and bounced back in 3 months. In the GFC, Hybrid Funds dropped a sharper -18.6%, taking 1 year 8 months to recover, whereas Debt Funds stayed almost unaffected. This shows that Debt Funds offer stability in crises, while Hybrid Funds face bigger shocks but eventually recover.
– Which Category Provides Better Downside Protection?
In Pure Downside Scenarios (market crashes): Debt funds win. They preserve capital better as they’re insulated from equity volatility.
For Investors Focused Purely on Safety (no tolerance for volatility): Stick with high-quality Debt Funds (Gilt, Corporate Bond, Liquid).
For Investors Seeking Stability + Growth (and can handle some drawdowns): Go for Hybrid Funds, especially Balanced Advantage Funds (BAFs) or Conservative Hybrids.
– Final Word
Debt funds provide stronger downside protection by preserving capital during market crashes, while hybrid funds, though more volatile, balance safety with growth by recovering faster in rebounds. The right choice depends on your risk tolerance debt funds suit safety-first investors, while hybrids fit those seeking a blend of stability and long-term growth.
To understand more on the topic as well as to start investments please feel free to contact us:
Phone: +91-9324609115
E-mail: team@richvikwealth.in
The article is authored by Mr. Saurabh Gosavi from Team RichVik.